We've noted in the past that financial regulation can have some unintended consequences.

A good example is the Volcker Rule, which was designed to limit proprietary risk. But some sell-side clients haves suggested that the rule might lead to less efficient agency trading as market making might be inhibited. Another example stems from the regulatory effort to shift OTC derivatives trading to central clearinghouses. This ranks as one of the least understood mandates of Dodd-Frank.

The goal is laudable and the logic is certainly understandable and even compelling. By shifting the market away from OTC dealers and onto exchanges with central clearing built in, the SEC is aiming to shift risk away from counterparties and onto exchanges and clearinghouses, a system that will call for trading participants to post collateral.

But a recent paper by the BIS notes that, "Partly as a result, clearing of OTC derivatives is currently the preserve of a few large dealers, with around 5-15 institutions dominating turnover in all instruments within each derivative class. This raises the concern that the move to clear all OTC derivatives centrally could potentially further reinforce the concentration of risk in those global dealers. While the access policies of CCPs and new laws and regulations governing them are continuing to adjust to the new era of mandatory clearing, such concentration remains a relevant issue."

One implication here is that a lot is riding on configuration of the new market. That will have a direct impact on risk mitigation. In the United States, one would hope that SEFs will eventually provide healthy competition and effect enhanced risk-reduction.

However, while "new entrants are developing central clearing services. So far, global CCPs continue to predominate, and it is unclear a priori whether the new entrants will be able to establish a significant market share in an industry characterised by strong network effects. At the same time, there is evidence that OTC derivatives dealers are willing to connect to more than one CCP, and, moreover, there may be some advantages to multiple CCPs serving different markets and market participants."

The leading OTC derivative clearing operations remain the ICE and the CME. 

For more:
- here's the paper

Related articles:
Blankfein on Volcker Rule, OTC derivatives   
Emerging OTC derivatives market a win-win quickly?